The wave of pessimism that has plagued the tech-stock sector so far this year has not spared Veritone (VERI) stock either. Its shares have run a large deficit since the beginning of the year, falling more than 65%.
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This performance is not surprising and likely to continue in the coming weeks, leaving me bearish on this stock. It stems from the fact that investors today are attracted to something other than companies with strong future growth prospects.
Heavy focus has been placed on specific industries such as oil and gas, as investors take advantage of increases in the commodity prices. Also, many individuals have been more attracted to companies that guarantee the payment of dividends in periods of high uncertainty, such as the current environment.
About Veritone
Veritone designs and develops artificial intelligence software solutions that transform audio, video and other data sources into actionable information that benefits other organizations, which need to work more efficiently.
The technology leverages an ever-expanding ecosystem of machine learning models.
The company’s headquarters are in Denver, Colorado.
On TipRanks, VERI scores a 5 out of 10 on the Smart Score spectrum. This indicates a potential for the stock to perform in-line with the broader market.
Tricky Financial Condition, amid Tough Economic Backdrop
In Veritone’s case, there are vulnerabilities affecting its financial condition, which the company is attempting to prevent from spiraling out of control.
But the larger problem is has been Veritone’s place in the current economic downturn, and investors are rightly concerned about that.
Issues that could hamper the company’s expansion include worrying price hikes for goods and services, which could deter consumption, and rising energy costs, which could significantly eat into profit margins.
Lower consumption and lower profit margins could impact the operations of some companies in such a way that they may decide to cut back on spending on innovation and AI solutions.
In mid and small-sized companies in particular, these types of investments are sometimes made more out of a desire to make the business appear more contemporary and of higher quality, rather than because there is a real need within the organization.
Not to mention the risk of stagflation if the U.S. Federal Reserve’s monetary policy to raise interest rates proves ineffective or too aggressive, which would cause many growth-oriented companies with fragile balance sheets to collapse.
Some Stats About Veritone’s Balance Sheet
From a financial strength perspective, Veritone’s balance sheet doesn’t appear to be very strong.
As of March 30, 2022, the total debt of $200.34 million was offset by total equity of $56 million, resulting in a debt/equity ratio of 3.58 times.
The company is aggressively financing its growth with debt, and just this is sufficient to define Veritone’s business as a high-risk investment. In addition, the following two aspects significantly increase the risk.
Veritone has a weighted average cost of capital (WACC) of 19.11% versus a return on invested capital (ROIC) of -66.60% and a heavily negative interest coverage ratio defined as EBITDA to interest expense. In the first quarter of 2022, Veritone’s EBITDA was -$9.985 million while the interest expense was $1.182 million.
The first ratio states that the company will not create value for its shareholders until Veritone achieves positive returns that exceed the cost of the capital required for any of its investments. And, as shown by the second ratio, this would give the stock a significant boost. Moreover, Veritone is currently taking on the debt it can’t cover.
Higher Sales, but Gloomy Outlook
Thanks to the acquisition of an AI recruitment platform in North America and continued organic growth, revenue for the first quarter of 2022 rose nearly 90% year-over-year to $34.4 million, beating analysts’ median forecast by $1.11 million.
Looking ahead, Veritone expects second-quarter revenue to double from $19.2 million in 2021 to a range of $38 million to $39 million this year.
The company also expects total revenues for full-year 2022 to be 1.5 to 1.7 times higher than last year. So Veritone expects total revenues of $180 million to $190.0 million this year.
However, global conditions are likely to weigh negatively on growth prospects amid ongoing severe geopolitical and economic issues, while the Fed’s hawkish stance to curb soaring inflation could increase borrowing costs.
I am of the opinion that this situation will continue to affect Veritone’s stock.
Wall Street’s Take
In the past three months, six Wall Street analysts have issued a 12-month price target for VERI. The stock has a Moderate Buy consensus rating based on three Buy and three Hold ratings.
The average Veritone price target is $18, implying a 137.15% upside potential.
Valuation
Shares are changing hands at $7.75 as of this writing, for a market cap of $279.53 million, a price-earnings ratio of -3.8 and a 52-week range of $7.14 to $37.14.
Plus, the 50-day moving average is currently $11.94 while the 200-day moving average is $19.14, so the stock doesn’t look expensive compared to these stats. Although, both indicate that the share price has been trading much higher in the past year.
However, a lower price doesn’t mean abandoning the bearish approach for this stock as the outlook for the company looks quite challenging. This is translating into expectations for lower stock prices in the coming weeks.
Conclusion
Right now, the market doesn’t reward companies that have to grow more than others to start making a profit.
The current state of the U.S. and international economy is such that the environment could slow down the plans of Veritone and other growth technology stocks as they try to move forward.
This investment is seen as too risky by intrepid investors, as well.
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